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Don’t let Woodford put you off unquoteds, say trusts

6 September 2019

Fund managers of Merian Chrysalis and Augmentum Fintech make the case for accessing private companies within the ‘closed end’ structure of an investment trust.

Investors may be wary of unlisted investments after the suspension of Neil Woodford's Equity Income fund but investment trusts argue that a stagnating flotation market means those who ignore private companies are missing out on some of the best opportunities.

The difficulty of quickly selling unquoted stocks - as well as smaller companies listed on the stock market - lay at the heart of the Woodford Equity Income  gating as former star fund manager Woodford found it impossible to find the cash to return to investors who were selling out of his underperforming fund.

However, the Association of Investment Companies, among many others, have argued that the suspended fund's problems were more about the dangers of holding too many illiquid investments in an open-ended fund where investors can demand their money back everyday.

The AIC, the trade body for investment trusts, has used the Woodford scandal to promote the advantages of the 'closed-end' structure of its members, which means they can never be forced to sell assets like Woodford Equity Income - although, as his struggling Woodford Patient Capital (WPCT) investment trust has proved, their shares can plunge to steep discounts below their net asset values in times of distress. 

This week the AIC held a media event to publicise its new Growth Capital sector for stock market listed funds tapping into private companies.

Richard Watts, co-manager of Merian Chrysalis (MERI), an investment trust launched last November to invest in unquoted growth companies, said investors were faced with a shrinking stock market as businesss delayed making initial public share offers (IPO) and floating on the stock market.

‘We are increasingly noticing that companies are staying private for longer,’ he said. ‘In 2011/12 the average age of exit for a private company was five-to-six years form first funding to exit. In 2018 it was 11 years.’

He said the reluctance to list means ‘value creation in the private market is being lost to the public market’.

‘If you measure the number of IPOs per year back to 1997; in the 10 years since the credit crunch there were 90 IPO a year but in the lead up to it there were 220 a year,’ said Watts.

‘You need 150 to 160 IPOs for the stock market to stay consistent. The stock market in the UK is shrinking. In 2019 we are on track for 20 IPOs and 2020 is not going to be a great year for companies being admitted to the stock market.’

Watts, a Citywire A-rated smaller companies fund manager at Merian Global Investors, said there was $10 billion of venture capital money in the UK and ‘the market is large and very liquid, despite some of the news that is out there with Woodford’.

Guernsey-based Merian Chrysalis has made a good start with its investments in TransferWise, Secret Escapes, and Starling Bank, its shares rising 28% this year to a 20% premium over net asset value of 111p, according to Numis Securities. 

Watts, who also runs the Merian UK Mid Cap open-ended fund, said the trust aims to ‘come in at a later stage’ as companies stay private for longer meaning ‘they are getting bigger and there is a need for liquidity as early investors need to realise some gains’.

Launching a listed investment company that invests in unlisted companies can be jarring for some investors, and Richard Matthews, manager of Augmentum Fintech (AUGM), the financial technology trust spun off from RIT Capital Partners (RCP) in March 2018.

He said the £94 million it raised at launch was ‘a struggle’ because it is ‘not your typical investment trust’. The fund has its roots in a venture capital fund that Matthews said he and co-founder Tim Levine ‘accidentally’ raised over lunch with Lord Rothschild, chairman of RIT.

He said investment trusts offer private companies ‘patient, permanent capital’ without the strict five-year investment timetable of venture capital funds, which is especially valued in the world of financial services technology that tends to move at a slower pace.

‘A typical venture capital fund strategy is five years investing and five years harvesting,’ said Matthews.

‘But we found that after five years companies were not at a point to sell but the fund structure said they had to sell their stake. So companies are going out to market trying to raise money and saving ‘things are going great’ and you have shareholders trying to sell, which is a bad look for companies out in the market.’

This mis-match of needs meant the investment trust structure was far better suited to investing in fintech companies, as well as opening up these investments to a wider retail audience.

‘Private for longer is a dynamic we’re seeing more and more, and it is playing out across the world,’ said Matthews.

‘In the US, you want to invest in Uber at $80 billion but wouldn’t you rather have accessed it at $100 million? Of course you would, but how do you do it?...Investors hear about these things, and see the valuations tick up.’

Matthews argued that much of the value is gone by the time hot stocks reach the market and investors are losing out on the growth but failing to back private companies.

‘We are offering the opportunity to invest earlier in the life cycle before the value is captured and before it starts tailing off,’ he said.

‘Is the IPO the best point to buy in? The only reason companies IPO is to get liquidity and do you want to buy when other people are selling?’

Investment company news brought to you by Citywire Financial Publishers Limited.

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